October 4, 2016
By: Jonathan Brewer
Seventy five years after the first use of an atomic bomb, the proliferation of weapons of mass destruction (WMD) continues to be a threat to international peace and security. Each year, governments invest major resources in combating the quickening spread of WMD, which include nuclear weapons. Examples are the disrupting of the procurement networks, prosecuting the individuals and companies involved, and disrupting the money flow.
The UN Security Council (UNSC) has approved a number of resolutions to combat financing of proliferation (FoP). In 2004, UNSC Resolution 1540 required governments to implement controls on the financing of export and so-called transshipment –shipment to an intermediate destination – of goods and services related to WMD and their means of delivery. UNSC sanctions resolutions on North Korea’s WMD programs require governments to implement a range of financial controls, and although UNSC sanctions as such on Iran’s proliferation-sensitive programs have been terminated, a range of financial restrictions related to these programs are still in place under UNSC Resolution 2231 (2015).
Nevertheless, identifying the money flows to proliferation of WMD remains difficult. Despite much information regarding procurement of proliferation-sensitive materials and their means of transfer being publically available, much less information exists regarding methods and means to finance such procurement. A better understanding of FoP typologies would greatly assist to efficiently tackle this worldwide threat.
Studies and reports to-date
The most recent comprehensive review of FoP typologies, called the Typologies Report on Proliferation Financing, was published in 2008 by the Financial Action Task Force (FATF), a global money laundering watchdog. As of 2016, the FATF consists of thirty-five member countries, including the UK, China, France, Germany, Russia, and the US. Since that time, more information has become available on the money flows that fund proliferation, particularly relating to Iran and North Korea’s programs.
In 2014 and 2015 information on FoP was published by the UN Sanctions Panel on Iran, based on material supplied as a result of requests to governments and the private sector. This exercise demonstrated that relatively few national authorities held specific data regarding FoP, and where they did, the data were usually related to circumvention of financial sanctions relating to WMD programs. Similarly, transaction monitoring and other compliance procedures carried out by banks and financial institutions were usually targeted at sanctions compliance rather than identifying FoP.
Examples of typologies
Following are examples of FoP provided by UN Sanctions Panel on Iran:
- a financial transaction involving a purchase order, the payment for which was initiated by a front company in Iran through another designated entity, which transferred funds through an Iranian company in the food business to a non-UN sanctioned Iranian bank.
- a trading company set up in the Middle East that opened a series of accounts that were denominated in local currency and in euros, USD, and other foreign currencies. The local currency funds, which were suspected to be coming from Iran, were channeled through the trading company and then quickly switched into foreign currencies and transferred overseas.
- a company in the Middle East, in partnership with a foreign national as a minority shareholder, opened an international bank account and made multiple large payments to several European companies. This was identified as possible money-laundering, and further investigation revealed that the company manager also managed a company that did business with Iran.
- a payment, which was originally thought to be made to a company located in a neighboring State to Iran, turned out to actually have been made to an Iranian company in a State neighboring Iran.
- an import Letter of Credit (LC), covering goods which were originally thought to have been shipped by a neighboring State to Iran, was found to have actually shipped those goods through an Iranian company. The beneficiary of the LC in the neighboring State acted as front company to the Iranian company.
Study seeks information that enables identification of patterns or trends in FoP
In order to better understand and disrupt the flow of money into WMD programs, King’s College in London, one of the world’s leading universities for education and research, has initiated a year-long study funded by the US State Department’s Office of Export Control and Related Border Security (EXBS). The purpose of the study is to publish usable ‘FoP Reports’ that collate and analyse information held by governments and the private sector on FoP and on circumvention of financial sanctions relating to WMD programs. These FoP Reports will consist of case studies, risk indicators, patterns and trends, classifications and types of FoP as well as circumvention of financial sanctions, and how these vary amongst different proliferation programs. King’s College aims to publish these FoP Reports by mid-2017.
The FoP Reports are intended to address the requirements of both government and the private sector. They will support longstanding government efforts to:
- Identify FoP or circumvention of financial sanctions, and investigate the individuals and entities involved;
- Disrupt proliferation networks (by preventing their financing) more broadly; and
- Provide guidance to financial institutions regarding the financing of proliferation and implementation of financial sanctions.
The Reports will also assist financial institutions to:
- remain compliant with sanctions;
- identify transactions relating to FoP or circumvention of financial sanctions and take action as necessary, such as filing a suspicious activity report or otherwise informing the relevant authorities in their respective countries. More specifically, typologies may assist financial institutions to process financial transactions involving such countries like Iran, a market where foreign investors and businesses attempt to re-engage following Implementation Day on 16 January 2016.
Much of the data held by governments relevant to the Study will be classified, and data held by banks, financial institutions or commercial organizations may be governed by banking secrecy regulations or commercial considerations. The Study is not seeking the details of such data but instead is seeking information that enables identification of patterns or trends in FoP. Information collected by the Study will be held in secure storage, and consistent with King’s College, London standards. The sources of information need not be identified in the Study’s Reports.
For further details, or to offer information to the Study, please contact Dr Jonathan Brewer or Mr Ian Stewart. Based in New York, Dr Brewer is a Visiting Professor at King’s College, London and was the financial expert on the UN Panel on Iran between 2010 and 2015. He can be contacted on +1 917 900 7636 (mob), on +44 7815 848 418 (mob), and on Jonathan.Brewer@kcl.ac.uk. Mr Ian Stewart is a Senior Researcher in the Department of War Studies at King’s College, London, and Head of Project Alpha on non-proliferation. He can be reached on +44 207 848 1342 (off) and at Ian.Stewart@kcl.ac.uk.